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good fell investors there have been a lot of requests for me to analyze specs the special purpose acquisition vehicles that are flooding the market now so due to my curiosity and i'm always interested also in what great value investors are doing because if we look at set clarman's portfolio of course we have ebay that we discussed in video link for the video in the description of course as always he has then this television assets but one of the largest portfolio is pseh which is bilakman's pershing square tontine holdings a new spec that we are going to discuss so let's immediately start with the definition then discuss pursuing as an example then the general returns why hedge funds like said garments are invested which is not why you might be invested that's the key to understand before investing in these vehicles what are the expected returns on what returns depend and then also a general overview of what this means for the market let's start so specs are blank checks companies so you have a person in this case bill ackman he said he'll start a spec company five to seven billion and then you think your wife is a spender look at b lakhman five to seven billion blank check that i can spend on whatever i want this is a typical example of money printing that we have discussed there is so much money in the environment so if you are bill and you can get to five to seven billion of other people's money to invest in something of course you're going to do that the companies are already public so before they have invested into something else they are public and they are looking to invest into not listed companies and by acquiring them make them public change the name and then develop them and grow them and of course make money is the ultimate goal they can merge whatever get the minority larger or whatever let's do an example and then you'll see how it really works if you enjoyed this please click that like button so as we said pershing square downtime holdings five to seven billion blank check acquisition company what are they doing so they have taken the five billion and they want to make an acquisition with it bill ekman extremely smart guy we have discussed him in a few other videos and i made the video somewhere in march 2018 or 19 if i'm not wrong saying how you could invest with him with his company you can check that now the stock has rebounded significantly so it's different now he's hot and he can get the money two years ago everyone hated him but i'm going to continue to follow him because he's very smart and hate love sentiment we might find great buys of his when he's hated again and i'm sure given how investing is that he will be hated again in the future so the business is to identify and complete a business combination that creates substantial long-term value for our stockholders we intend to merge with one company through a transaction in which our stockholders will own a minority interest in the company that's created as a result of the initial business comp combination he has acquisition criteria so they are looking for a simple predictable and free cash flow generative business with barriers to entry what buffett calls a mode competitive advantage limited exposure to extrinsic factors so stable business strong balance sheet minimal capital market dependency very strong cash flows everybody's looking for these things large capitalization so that he can put five of eight billion of his money into the company let's say get 10 20 bond the market capitalization of the currently private company goes to i don't know 40 50 80 billion like this all the index funds have to buy it etc etc and if the company goes up by 20 bill ekman makes a lot of money and you do too so it's good and attractive valuation private companies might have lower valuations that than public companies now so that might be also a point that bill has in his head exceptional management and governance plus with the help of bill this might be really really interesting if we look at the stock price since start okay it has gone higher already even if there is no there has been no acquisition announced and whites went higher it's because of warrants because of hedge funds arbitrage which is why seth clarman is invested not really that he is betting on bill and the great fine he can do and that's something to understand very very well so let's discuss the investment rationale a lot of specs new specs everybody is running into those if we look at the numbers 2007 just before the crisis that was again a hot way to go public and here we go again same old same old wall street stories or is there something in for you is there something that you should invest in and that you can make a lot of money so we have a lot of competition now it's getting hot there is so much money in the system and you can get 500 million like this so all these hedge funds softbank blackman ex barclays banker azar 250 million so if you can get 250 million of other people's money if you make 20 you get your warrants your cash out your bonuses your everything it's practically a no risk way to make money i should do a spec too if i get 100 million i go 220 million bonuses unlock i get 10 million and i'm set for life so it's no risk of doing business with other people's money and the way that the rich get richer but there is more to that spotify also in germany they are going to get 400 million euros for a spec so everybody is trying to get as much money when there is so much liquidity in the market it gets to these kind of situations where you try everything there is no risk for you if you lose you go on to the next venture but let's look at the returns first the rationale for hedge funds to investing and then the actual returns that specs had over the last years for hedge funds very positive for retail investors very very negative this is the anatomy of a hedge fund spec trade investors pay 10 dollars for one share and get one warrant a warrant is an option so that you can buy another share at the same price if the stock goes up bimbi you get another share at 10 bucks and you can sell it on the market 20.
so cash is held in a trust account and invested into short-term treasury bills hedge funds can buy shares if they dip below cash thus they might make money when cashed out so they protect themselves and warrant can be flipped for a quick profit or retain in the case the value rises as we have seen with pershing tontine so if clarman started here with 21 he invested i don't know 500 million he is now at 26.
bam bam 20 return plus on the warrants double the money 40 return beam boom very very fast this is hedge funds when the deal is announced if the shares go up the hench funds can sell on top of the 20 they already made if they dip below they can redeem they can the money so okay that's a risk but still keep their warrants if the stock goes up deal closes merge identities now owned by more long-term shareholders and this only here is where you come in if we look at the returns so the research has been made and hedge funds have made an annualized 11.6 return on the 47 specs that agreed mergers between january and june 2020 so hedge funds make money on arbitrage no matter what where do you fit in as you are not a hedge fund this is where you fit in spec flops so three months the return 14.5 23.8 negative percent and others 65.3 percent example of specs nicola corporation okay bim boom very high high exuberance guy that launched the spec made here banked a lot of money sold war and sold stocks and then he made his money and the rest is history retail investors investing in spec here or waiting for something to happen maybe made on the run here up but probably also lost here down we have pershing square holdings that's now very hot if they benefit from this but also we have seen other specs do really really good with virgin galactic that's good so if you want to bet on a spec you bet on the jockey you bet on fali hapitia for example if you think they are really capable of doing that be like man of course so most of the specs lose money because they don't have the power how can they compete with blackman very unlikely so really think how this fits i really wanted to show you where are the returns coming from for hedge funds for those that launched the spec and for retail investors as you of course possibly there will be the next nikola the next tesla the next whatever with doing such things a croatian rematch company the big hot cars they have also the option and they have been approached by many many specs to go public like that they hope to go the normal way public because he doesn't like the owner i might make a video on them too very interesting company so on the market what it tells us on the market is there is so much money in the system and uh simply it's going wherever they can to find some yield from hedge funds going into onto arbitrage from making public companies just to try on something on a promise ekman is looking for great deals and when i look at his acquisition criteria i'm definitely going to follow because this can be a great long-term investment but of the others what we did we say 120 specs a lot will be really crazy crazy bets so as always see how this fits your portfolio if you enjoyed this please click that like button consider subscribing and i'll see you in the next video
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